Many people feel that insurance is a “necessary evil” because their premiums continue to go up every year. They turn in small claims but have to pay a deductible. Once they pay the deductible the insurance portion is minimal. So why bother?
Rule # 4- Sometimes a small loss is worth taking.
This rule appears to be counter intuitive. A loss, no matter what the size, is unpleasant. It seems that common sense would say that no loss, no matter how small, is acceptable, if instead it could be paid by an insurance company. But you have to understand that insurance is designed to protect against catastrophes. It is not designed to be a maintenance policy. You are better off paying small frequent losses out of your pocket. If you increase your deductible, you can help yourself in a couple of ways. First, it will decrease your premiums. Secondly, by turning in less small claims, your cost of insurance will be reduced over the long run. The summation of this rule is that insurance is most effective when it is used to protect against large unexpected losses.
The purchase of insurance is to protect you from catastrophic loss but you also want to protect you and your family in the most economical manner possible.
Rule # 3- Don’t Risk A Lot For A Little
Sometimes, when you do your risk evaluation, the potential loss is big, but the cost of insuring against it is cost prohibitive. Take Long Term Care insurance; the potential cost of nursing care is very large, but if you have health problems and are over 75 years old, then the cost of insurance is probably too expensive. But, there are many circumstances where there is potential for a very large loss, but the cost to cover it is minimal. An Umbrella policy, for instance, provides catastrophic liability protection. A $1,000,000 policy might cost a couple hundred dollars a year. (You can get a much higher limit of Umbrella coverage if needed.) In essence, the third rule states that there should be a reasonable relationship between the risk of the loss that is transferred to the insurance company and the cost involved in transferring the risk.
The purchase of insurance does not reduce the chance that you will incur a loss, but it does reduce the financial risk associated with the loss. You simply cannot go out and spend a budgeted amount for insurance in a very haphazard and nonchalant manner, and expect to be fully protected.
Rule # 2- Consider The Odds
Obviously, when thinking about what risk you want to guard against, you will consider how likely the loss is to occur. But, just because the odds are relatively small, don’t forget rule number one. Considering the odds doesn’t mean you automatically purchase the insurance. Take Long Term Care insurance for instance- even though the odds are greater than 50% that you will need nursing care, if your assets are below a certain level, it would not be a wise purchase. Flood insurance is one type of insurance that many people avoid, even though the potential for loss is huge. If you live on high ground, you may decide not to purchase flood insurance because the risk of a flash flood is so small. So in considering whether to transfer the risk to an insurance company or retain the risk personally, consider both the odds of a loss occurring, and the odds of how bad that potential loss will be.
For many people, the purchase of insurance is a “necessary evil”. It is something they know they need, but they don’t really want to think about it and they really don’t want to spend “too much” money on it. This leads to the all too common problem of spending more than enough for insurance and still not getting proper coverage. Insurance and Risk Management is not rocket science, but there are a few basic rules to follow in order to get the most “bang for your buck” on insurance purchases.
Rule One- Don’t risk more than you can afford to lose.
This is the first and most important rule. The primary purpose of insurance is to protect you from catastrophic loss. If you are looking to reduce your insurance premiums, don’t do it by reducing or eliminating coverage on an exposure that could financially bankrupt your family if it were to occur. Following this rule would dictate purchasing enough liability protection to cover your assets in the event of a lawsuit and having enough life insurance to take care of your family in the event of the breadwinners untimely passing. Disability and Long Term Care insurance are two other types of insurance that could help you deal with a very severe hardship. However, Disability and Long Term Care, along with Life insurance are forms not everybody will need. Before purchasing these lines of insurance, check with your trusted agent, as to whether, in your particular financial situation, you need a certain type of insurance. Beware of any agent that always touts a particular type of insurance without first questioning you about your own financial situation.
Life insurance is designed to be income tax free to the beneficiary, but depending on who is name as the owner, it cam be included in the decedents estate. The policy owner is often the insured person, but could be another “interested” person. The policy owner owns and controls the cash value and is the only one who can make changes to the policy. Although the benefits are tax free, if the insured retains any incidence of ownership”, the policy proceeds can be included in their gross estate.
Many of you might feel your assets are well under the amount that is needed to force you into paying estate taxes. But, keep in mind, you must add the amount of your life insurance to the total of your other assets. This might have a negative effect and put you over the threshold, resulting in your having to pay estate taxes, when otherwise you would not have to.
To alleviate the problem of having your life insurance proceeds included in your estate, you can transfer ownership to another entity. This could be a spouse, an adult child, or an irrevocable life trust. The transfer must be done at least three years prior to your death to be valid. Once an irrevocable trust is established, it cannot be rescinded or modified in any way.
The purpose of life insurance is to take care of your desired beneficiaries when you pass on. Many people spend much time deciding on the type of insurance and pay the premium for years, yet do not periodically check their beneficiary designations. Whether due to death or divorce, the person or persons you designated as the beneficiary might not be around any longer, or you might need to change the beneficiary for various reasons. The owner has complete control over the naming of beneficiaries, and can change the beneficiary up until the time of the death of the insured. The beneficiary can be one or more individuals or an entity such as a church or charity. Minors should generally not be named as beneficiaries, as the courts would have to name a guardian to administer the funds on behalf of the minor. Contingent beneficiaries are secondary beneficiaries that can be named. They get no benefit unless the primary beneficiary has already passed away. In general, you do not want to name your “estate” as beneficiary. Life insurance is designed to bypass probate, but if you name your estate as beneficiary, proceeds paid will be subject to the expense and time delays of the probate process. The bottom line is that every few years or after “life changing events”, you need to check your beneficiaries to make certain they are the ones you want to inherit your wealth.
Don’t make the mistake of thinking you can change your beneficiary in your will. The beneficiary of your life insurance policy can only be changed with a change of beneficiary from for your life insurance policy.
The proceeds of life insurance can provide great comfort for a family after losing a loved one. The proceeds can help support a young family after the loss of the “bread winner” by providing lost income and paying off an existing mortgage or other debt. The proceeds can also be used to pay for final medical expenses and funeral arrangements for the deceased. Although the benefits are clear, there may be some quo question whether the end result is worth the current payout. You may wonder if the funds paid for life insurance could be used to do things that can be enjoyed while you are living. The answer is found in how devastated your family would be at your passing, if you had no insurance. Would your family be able to pay off home or auto loans? Would your children still be able to attend the college of their choice? Would your family be able to maintain their current standard of living? Would paying your final expenses be a burden on your loved ones? If you answered “no” to one or more of these questions, you probably need some form of life insurance. If you are at the age where you no longer have young children at home, and you hate little if any debt, you might have old life policies in force that you could either reduce the face amount or eliminate altogether. While life insurance proceeds can always be a blessing, if you are behind in retirement savings and no longer feel the need for the life insurance, you might want to redirect cash from paying life insurance premiums into retirement savings.
If you do not need Life Insurance protection for your entire lifetime, then you do not need a permanent cash value insurance policy. If you just want coverage for a certain period – say 10 years until your children leave home, you would simply need a 10 year level term policy. If you have a 30 year mortgage, then you would need a 30 year level term policy. The least expensive way to purchase life insurance is to lock in the rate (level) for the longest time period you desire coverage.
If you want coverage until the day you die then you will want permanent insurance, as term insurance will be too expensive in your later years. If you are a young couple and cannot afford a permanent cash value policy, instead of purchasing a lesser amount of insurance, purchase the full amount you need in a level term insurance policy.
It would be good to work with a Life Insurance Specialist to help guide you through the process, but it is still very important that you have a basic knowledge of life insurance before making a decision on the protection you need.
If you need guidance then please give us a call. Our Life Insurance Specialist will work with you to determine your need and find a product that suits you.
Choosing a life insurance policy and value can be difficult for the consumer. How do you factor in all the possible final expenses plus what you would want to be left over for your family’s needs. If you have no dependents and no outstanding debts, you may only need a nominal amount. But, if you have a home mortgage, along with some consumer debt and multiple beneficiaries, then acquiring the proper amount of coverage is of utmost importance. So how does one arrive at the magic number that will sustain their family if they pass?
The calculation in determining the needed amount of Life Insurance includes four steps. First determine the amount of money needed to cover immediate bills and your funeral cost. Second, figure the amount needed to pay off your home mortgage, or to have sufficient cash for your beneficiary to pay the monthly mortgage. Third, add the amount of income that would need to be replaced and for how many years. Fourth, you might want to leave some cash for your children’s or grandchildren’s education.
Following the steps above will help you get a general idea of the amount that you need. Working with a Life Insurance Specialist allows you to be sure you have accounted for your future expenses and have not overlooked anything. If you have questions regarding Life Insurance, please give us a call!